Category: Entrepreneurship/Innovation

In the OnStartups blog is a very perceptive piece on the state of the enterprise software market.Â The post Y2k dotcom bust has had some deep effects on the industry.Â In a backlash against the vendor bull market of the late 1990s large companies reined in IT budgets and revised their procurement processes.Â Deals that previously would have needed one signature now need five, or eight.Â Buyers have become ultra-conservative, falling back on the giant vendors to the exclusion of purchasing from smallerÂ companies. This can be seen in theÂ margins of Microsoft (25%) and Oracle (24% net margin) compared to everyone else.Â Most other enterprise software companies, even the successful ones, have operating margins in theÂ teens.Â Â The five year average net margin of public application software software companies is 13.6%.Â Even a company like Business Objects has a five year net margin of just 7%.

Venture capital firms, seeing this, have moved on to funding “Web 2.0” ventures, which typically require a lot less capital (Flickr reputedly needed around USD 200k in capital to get going).Â Why bother funding companies which need millionsÂ in R&D and expensive enterprise sales forces when you might find the next Myspace for a bargain?

This is unhealthy, and not just for small enterprise software companies.Â As I have writtenÂ before, innovation rarely comes from industry behemoths, so by creating an environment where companies are buying only from “safe” companies they are in fact damaging the ecosystem which will bring them their next new and exciting software application.Â By sticking to the giant software vendorsÂ CIOs are creating an environment where smaller companies struggle, which causes VCs to invest less, which means that fewer and fewer enterprise software companies get started at all.Â This in turn allows the giant vendors to charge whatever they want in upgrades (witness those margins) as they now lack serious competition.Â Cartels are never a healthy thing for customers, and yet in this case the customers are bringing it on themselves by creating the conditions for aÂ cartel to effectively exist.

In a b-eye network article Bill Inmon reminds us of the importance of patents, especially for small start-up companies.Â The current case against Blackberry is indeed a salient reminder that a patent infringement can bring very serious consequencesÂ even to a market-leading company.Â I would go further than Bill in suggesting that start-ups need to seriously consider all their intellectual property, which as a well as patent applications extends to trademarks also.Â

Patents can take a long time to sort out – Kalido’s core design patent was applied for in 1998 yet only granted in 2003 in the UK, and in 2005 in the US.Â Certainly the US patent office is a curious beast which has many quirks, but being fast moving is not one of them.Â However once you have a patent application in you can claim “patent pending” and are pretty much protected (unless of course, the patent application is rejected).Â Start-ups need to consult with a patent lawyer early on if they are to avoid trouble.Â For example, if you market something, which can constitute a demo a beta version of your product to a prospect, then you have 12 months to register for a patent on it or you may invalidate any future patent application.Â It would be easy to see how someone could fall on this kind of legal tripwire.

The name of your company or product is also worth protecting via trademark in the countries that you expect to be marketing in.Â Â This is less troublesome than it used to be thanks to some international reciprocal arrangements that mean you no longer have to file a trademark in every country individually.Â However some countries (including the US) are not yet signatories to this accord.Â There are several unfortunate cases of products being marketed and then suddenly discovering that they violated a trademark in a key market.Â The costs of either withdrawing the launch, rebranding or fighting a court case can be very high, especially compared to the relatively modest costs of registering trademarks in the first place.Â

You would hope by now that people would have figured out that registering web addresses is a free-for-all, yet you still see cases in the newspapers of well-known companies finding that that the natural internet address of their latest product has just been hijacked by some guy in Oklahoma who would like a large some of money for it, thank you very much.Â

All these aspects, web names, trademarks and patents, need to be considered carefully even by the smallest start-up.Â There are costs to be incurred, but the alternative can be disastrous, and patents in particular can be a genuine asset down the line.

It is a big day for me today, as I have decided to move from Kalido to pursue other interests. Kalido has come a long way since I encountered some original generic modeling research at Shell in 1996 that I could see had massive potential to provide Shell with integrated information from across the world throughout business change. After success at Shell with the software, I set up a business unit to commercialize Kalido, resulting in Kalido being set up as an independent company in 2001, and, with the backing of major venture capitalists, subsequently spun off from Shell in 2003. By this time it was clear that the next phase of growth for the company was to become successful in the US market, the largest in the world, and as I am based in the UK, I handed over the reins of CEO, and assumed the role of customer champion, company spokesperson and chief strategist. There has been no shortage of projects to work on, and I have thoroughly enjoyed continuing to raise the public profile of Kalido, but now that a new CEO â€“ Bill Hewitt – has come on board to take the company to its next level of growth, I felt it was the right time for me to move on. Bill Hewitt has exactly the right background in enterprise software to take the company to the great commercial success that it deserves.

I have immensely enjoyed building Kalido up from an idea to a company with tremendous potential, and I look forward to seeing its continuing success. It has been an exhilarating experience for me, above all because I have had the privilege of working with a group of highly talented and committed individuals. It has been an immense pleasure to see so many examples of real business benefit in customer projects that have deployed Kalido in over 100 countries. The success that the company has enjoyed so far has been based on a passion for customer success and the high quality of its people, and is something I am extremely proud to have been associated with.

I intend to initially do some independent consulting and do a little writing. This blog, of course, will live on!

For some time I have been involved with an EU project that wrapped up last week in Brussels. With the unpromising name Sun&Sup it tried to identify the issues that hold back hi-tech start-ups in Europe, and to make recommendations that could improve the current situation. The project invited periodic input from selected hi-tech start-up companies across the EU (along with various service providers to start-ups) and I represented the UK on this project.

Make no mistake that there is a problem: once you get beyond SAP, Business Objects and Sage you will be hard pressed to name a large European software company. Israel has done a better job than the combined resources of Europe, with companies like Check Point Software, Amdocs, Mercury Interactive and many others. Israel has the second highest ranking for VC investment, and even in absolute terms has the second highest number of start-ups after the USA, yet it has a population of just over 6 million. There are many reasons for Europeâ€™s hi-tech malaise, and few easy answers. The Sun&Sup project tried to deliver some very low-key, pragmatic services in pilot form, such as a self-help network of companies wishing to expand across borders, an expert system to help companies assess their business plans, a mentoring program to provide non-executive directors for start-ups, amongst others. Its most ambitious recommendation was to lobby to replicate the US system in government procurement, which sets aside USD 100 billion of government spending for small companies. European government procurement favour large companies: 50% of economic activity in Europe is from SMEs, yet only 30% of government spending is with SMEs. Of course opening up more government business to SMEs would not be a panacea, but it would help, as the successful federal Small Business Act has demonstrated for many years.

The highlight of the wrap-up session of the project in Brussels was to hear the French Trade minister Christine Lagarde making an eloquent case for the need for change in public procurement. It was indeed refreshing to an Anglo-Saxon ear to hear a small business initiative being championed by a French minister. Ms Lagarde was an extremely impressive speaker, yet clearly faced entrenched opposition from the Commission and indeed from several member countries in trying to open up public procurement. Indeed, from the way that several of the modest Sun&Sup initiatives ended up being buried or transferred to other EU projects, it seemed clear that the lack of high-tech competitiveness in Europe is something that will remain the subject of much hand-wringing for a long time to come.

A survey by the Economist Intelligence Unit (sponsored by PWC) just released today has a very interesting finding that backs up something I have written about before: when it comes to innovation, don’t look for it in large companies.

In answer to the question:

“Small or start up competitors are more likely than large, established companies to create breakthrough products or business models” no less than 70% of senior executives “agreed” or “strongly agreed”, with only 10% disagreeing. Given the vastly greater resources and R&D budgets available to large companies, why the dearth of innovation there?

It is easy to argue that bureaucracy is the cause but I think there is another reason that I have not seen written about. I had some dealings with Oracle in the 1990s when they were concerned about the emergence of object databases, and they wanted customer input as to whether this was a real threat to them. What struck me in several meetings in Redwood City as I met with a range of senior Oracle technologists, was how that the most impressive people were the ones working on the database kernel, the core of the Oracle product. Less impressive were ones working on the applications, and least of all were some working on the tools layer above. This makes sense: if you are a top developer and join Oracle then you probably want to work on the crown jewels. Similarly in my dealings with my favorite Walldorf-based ERP vendor I have found the best people to have worked on the basis, the next best the modules, and the least impressive ones on the peripheral tools. Again, the key to SAP’s success has been its integrated ERP system, so it is hardly surprising that the top people gravitate there. Moreover the area which made the company initially successful is probably the one where the greatest understanding of the customer issues resides. The farther you move away from this the less likely it is that the best people will be working, and also the less likely it is that the senior executives (who built the company n the first place around a core technology) will grasp the opportunity and back innovation. Hence the ideas leak out of the company as those passionate about them leave to set up start-ups.

Andy Hayler

Andy Hayler is a passionate and outspoken commentator on the enterprise software market. A 20-year veteran of data modelling, warehousing and integration projects, he was named a Red Herring Top 10 Innovator in 2002 for founding Kalido – an innovative information management company that provides customers with the ability to dynamically view the impact of business changes. The views expressed on this blog are Andy’s own, and do not necessarily reflect the views of The Information Difference.